Black Toro on the Spanish mid-market

With Spain’s economy on the up, private equity activity is rising. Jose Manuel de la Infiesta and Ramón Betolaza of Black Toro Capital explain how the country’s special situations are shaping up.

Jose Manuel de la Infiesta

This article is sponsored by Black Toro. 

After a particularly difficult post-crisis period, Spain’s economy has rebounded over the past two years. In 2018, the country registered a 2.5 percent growth in GDP, according to European Commission figures, faster than the euro area expansion of 1.9 percent for the year.

Small wonder, then, that Spain has attracted the attention of a number of international private equity firms recently, leading to record investment volumes by the industry totalling €4 billion for the first half of 2019, statistics from Spanish private equity and venture capital association ASCRI show.

Yet it’s not just the international mega-funds that are finding attractive dealflow in Spain. The country is seeing an increase in the number of mid-market deals, with just 17 such transactions in 2017, 56 in 2018 and 31 in the first half of 2019 alone. While many of these will be typical mid-market investments, there is a strong supply of special situations across Spain, according to Black Toro Capital founding partner Jose Manuel de la Infiesta and managing partner Ramón Betolaza. We spoke to them about the development of the Spanish market and where they see greatest opportunity in their space.

Spain’s private equity market has been highly active over the past two years. What’s driving this?

Ramón Betolaza: The Spanish market has always attracted international private equity firms, and so we’ve always had large transactions here, but there is no doubt that, following structural reforms in Spain and an update of our legal system, we are seeing much more interest. However, we are really seeing significant growth in the mid-market space – the traditional private equity mid-market activity used to be under-represented relative to other European markets. It’s here that we’re really seeing growth as more funds are being raised. Investors were shying away from Spain before around 2013 and tended to favour other, more established private equity markets, such as Germany, the UK, Ireland and France, but that has changed over the past few years.

While you can still fit the entire ASCRI membership in a single conference room, we are seeing more private equity professionals emerge. They have often been trained internationally and are creating new teams. The market has certainly become more competitive, but that’s a good thing because it raises the quality bar.

What about traditional mid-market opportunities – how has the supply of these shifted?

Jose Manuel de la Infiesta: Perceptions have changed. It used to be that owners and managers of mid-sized companies felt that private equity firms were trying to trick them out of their businesses. Now, there is a far better understanding of what private equity can do – it is now seen as a good tool for improving internal systems and achieving higher growth. That is feeding into higher dealflow. And, as more success stories come from private equity portfolios, dealflow is likely to increase.

What types of special situations are there in Spain?

RB: The Spanish market is very attractive for special situations in our view. The market has undergone a significant change in that the wave of bank consolidations since 2008 has led to a systemic shift in the way business is done. The number of financial institutions that lend to small and medium-sized enterprises has shrunk from around 85 to just 12 over the past few years. Not only that, but in Spain there is a particular issue with concentration of SME lending, so you have just six banks with 80 percent of market share in SME lending.

We’ve seen situations where companies have credit lines with two separate banks that have subsequently merged. There, you go from two credit committees to one – and the result is that the two credit lines become just one smaller one. As a result of this, there is a structural lack of finance for growth in the Spanish market. That’s where our approach of providing flexible financing in the capital structure comes in.

Ramon Betolaza

How have you worked with companies in this kind of situation?

RB: Our investment in women’s shoe retailer Marypaz is a good example. A family business, it had expanded significantly from the 1980s and was a very successful company. However, two banks provided most of the company’s working capital and when these merged, it had to rely on supplementary finance and its debt costs increased significantly. The business was doing well commercially; it was just using the wrong financial tools.

We were able to provide an equity injection of €10 million and an additional €20 million via a convertible security to help the business improve its balance sheet. We were also partners to the family, supporting the business in its growth plans. The business hadn’t yet developed online sales channels, although it was still attracting 50 million people in its stores and so we have helped the business develop ecommerce capabilities. We also brought more sophisticated financial analysis to Marypaz so that management could see more clearly which were the best performing stores. The company is now in a position to expand internationally, with opportunities in Europe, the Middle East and Mexico.

JD: In common with other of our investments, Marypaz is also a good example of how we have a real social impact in local economies. Our investment in Marypaz saved around 1,000 jobs in Seville. This is an area of Spain with high unemployment, so this is quite significant.

Given the Spanish economy is improving, how will the special situations landscape change?

JD: We’re actually now seeing more special situations than previously – the landscape has grown. Four to five years ago, many Spanish companies needed to undergo operational restructurings. There are now some very good companies that have consolidated their positions over the past few years and they have had to do this with fewer financial resources. They have come out stronger.

However, the massive consolidation of the financial system we’ve seen here means banks just aren’t there to provide working capital. Companies can’t wait for banks to provide this and so they are seeking dialogue with firms such as ours. Our experience is in the credit analysis side and so we’re not typical private equity investors. Instead, we offer more flexible structuring through equity and equity-like instruments. We can take a company’s existing balance sheet and create an ideal balance sheet.

Where do you see most opportunity?

RB: We are seeing a lot of opportunity across many sectors, but in particular in healthcare and natural resources. We’re also seeing some possibilities in, for example, industrial components for the renewable energy sector. One of the big factors in Spain is that you have a large proportion of family-owned businesses that are going through generational change. Younger generations have a different view from their predecessors – they have a real desire to grow internationally, but they often need help and support for this. The number of good companies with strong growth plans far exceeds the amount of capital available to them.

JD: As the economy stabilises, we’re seeing more businesses with a solid business model that have left operational issues behind them. There are around 1,800 companies within our range of investment in Spain and, at any one time, around 10 percent of these will be facing some kind of difficulty regardless of where we are in the cycle. There are plenty of opportunities out there – we just need to keep our eyes open.